Zai Lab Limited (ZLAB) Earnings Call Transcript & Summary

Good morning, everyone. Thank you for joining today's Zai Lab session at our Global Healthcare Conference. This is Ziyi Chen, China healthcare analyst at Goldman Sachs. Today joining us are Zai Lab's Co-Founder, Chairperson and CEO, Dr. Samantha Du; CFO, Billy Cho; and Jonathan Wang, Head of BD and IR team. Thank you all for attending these sessions.

Just to start the session, here's one specific question that probably most investors will be highly interested is the impact of COVID-19. We actually start this question for each of the session. So could you please give us some thoughts on the impact on clinical trials, BD activities and also the commercial launch of ZEJULA, Optune in China in this environment, particularly in first quarter? And how we actually track the recovery of everything, gradually back to normal in May, June? So any thoughts on that?

Thank you, Ziyi. This is Samantha. Well it's still too early to confirm. But we have seen very limited impact to our business given the safety measures we have taken so far now of our employees have been infected, and we have clear procedures in place to deal with any situation should they occur. Having said so, we continue to monitor the situation very closely and Zai is doing everything we can to make sure our employees are safe and strong. With regards to the impact of clinical trials, we can't speak to other companies, of course, though we experienced limited impacts so far. We have been fortunate in that most of our new trials are scheduled to ramp up after first Q, which -- that was actually after the curfew from China. And our existing trials are in advanced status. Just for your information, in -- by year-end 2020, we have already 12 CTAs approved and 3 more being accepted and 6 for in-patient so far. With regards to the impact of ZEJULA launch, we were very fortunate that we launched ZEJULA at the January '20s before the curfew and also based -- even based on the last few months sales, we are very -- we are in a good position to say that our business is quite defensive. And we are not yet making changes to the 2020 revenue target. And ZEJULA has been commercially available since January '20s. And also, in response to the challenges caused by the COVID-19 outbreak, we've been taking immediate steps such as creating online physician and patient education and consulting platforms, getting on reimbursement lists at the provincial, municipal levels and also maximized our commercial insurance opportunities and we -- was the only one in China commercially available 23 days after the approval, which sets the industry record actually. And so that's about the clinical launch. The regulatory approval, as you have seen over the last few months, we've been reporting several NDA acceptance and also several -- and several NDA also subsequently put on priority reviews and also we received Optune approval, as you perhaps know. Optune was reviewed in the division where at the time at the height of the pandemic. The division sole focus was on approval diagnostic kits for COVID-19. So we were able to get this approval really speaks to, one, the unmet medical needs for GBM patients. And secondly, also, Zai Lab's team worked very collaboratively with the agency to meet this demand.

Yes. That's helpful. And as I mentioned, we do saw a lot of progress in Zai Lab and also from your global partners for some of the key assets. So basically, we feel like the hit rate of Zai Lab's licensing deals looks very impressive to me. So what are the key success factors behind picking the right assets? I think every single biotech names in China are dreaming about that capability. So what is the tricks behind that to really make this licensing deal that Zai Lab have done really that successful?

Thank you. Thank you. First of all, I would say, I want to contribute to the Zai team and especially the BD team supported by a very strong scientific team, both from preclinical discovery perspective but also from clinical perspective and translational perspective. And of course, our commercial team also have over 20 years of collective experience in China working on -- the CEO working really with KOLs and with -- also, our team experienced working with the regulators. I think all components are very, very important. But I would give perhaps this -- since our Head of BD is also on the call, I'll turn over to Jonathan to give you more color on this question.

Yes. Thank you, Samantha. Hi, everyone. It's Jonathan here. Like what Samantha said, we have a very thorough, very comprehensive due diligence process once we sort of start the dialogue with the other party, and this includes both internal as well as external advisers as well. But we have a very large internal team, and all of the different functions get involved. And we often have a look, debates, dialogues about the various data that we see. So it's a very collaborative, very open-minded culture that encourage challenging each other, very science- and innovation-driven. So I think that's the most important part. I think science, strong science capabilities gives us confidence, give us these high hit rates we've been able to achieve. So hopefully that continues. Yes.

Sure. I think we're still expecting probably that this licensing model is going to be one of our key strategies in foreseeable future, right? But now I think a lot of players, including pharma companies, including some of the emerging biotech companies, they're all looking for high-quality global assets. So are you guys any -- any of you guys observing some of the new trends in terms of the competition? The price getting higher, it's harder to get better quality assets and also potentially, we're seeing some of the geopolitical risks on that. So how should we look at the licensing model going forward this year, next year and particularly in competing with other players in the space?

Ziyi, that's a very good observation. And I think I will give some stride, some color on the overarching strategy and how we see this and perhaps Jon can chip in at some point. And first of all, I think the short answer to that is yes. We're committed to continue ours -- one of our arms of strategy, which is in-licensing as long as -- as well as internal discovery and development. That's all along to our overarching strategy. We're really dedicated to world-class innovation and that we have a very open innovation model. Innovation can come from either in our own lab through research or through licensing and the external partnership. And we've continued to develop and strengthen our capabilities in the infrastructure in both areas. And of course, if you go back to the history of the global pharmas and even with all this competition, with all of this and more companies are into it. Let's start from my early days at Pfizer, I was part of the global licensing team. And we -- but you still see companies continually looking inside and outside. So that trend will not change because of more people come to the market and there are now more people really, I would say, recognize the model and give credit to the model then follow the path. And having said all of this, we believe, one, is Zai has -- is a first mover. We do have the first-mover advantage. And we do have the reputation as a gateway to China and partner of choice. And with -- and all of these are being credited by the market is really due to, just you mentioned, this high success rate, but also due to the execution, excellent execution from the team not only able to licensing this high hit rate unmet medical needs assets, but also bring them in through development in China and then through registration and through commercialization and to launch very successfully and very efficiently at every step. I think that track record and that kind of reputation will keep us very competitive in this competitive market, and that will not go away. And I think as more and more companies, even in U.S. and outside China, realize actually China is not only the second-largest innovation pharmaceutical market, but also China increasingly plays a very important role in the whole global drug development value chain. So that alone and that they really even look more to companies like Zai who cannot only contribute to, say, commercial success in partner in China, but more development partner not just for China but also for global, like several I would say more and more our deals involve global co-development and -- which is not just bring few more patients, but also how to bring our expertise into the global drug development and also give strategic insights to the partners and -- on how to better leverage China's patient population, China KOL networks and the translational aspect of all of this. And like for ZEJULA's case, we did -- we read for the second line, we did this China-tailored specific Phase III trials and the data -- we announced the top line data. We announced recently the NORA data, which showed -- the NORA data showed that not only ZEJULA has consistent efficacy and -- with the trend we've observed in the U.S. in the 300-milligram dose, but also -- we also observed with our protocol, which was starting dose at 200 milligram, majority of those patients were on 200 milligrams with an individualized dose based on the body weight. And we've seen fantastic, clean safety profile, and we've seen much less thrombocytopenia and anemia versus the ones observed in Avestin trial, which was started at a 300-milligram body weight dose level. So all of this give Zai Lab a very competitive edge. And again, and I think recognize the geopolitical situation. And I think we recognize U.S. and China right now is having a really hard time from the politics -- from the politics level, but not from the people level. We're still seeing inbound interest, still very high inbound interest from the U.S. and other country -- companies' interest in collaborate -- interested in looking more in insights from companies like Zai Lab. And I think even though they will see attention for short term, but overall, long term, I think people cannot ignore the market potential, the Chinese -- the pharmaceutical market potential is already #2 and it's posed to be #1. And second, again, is the large unmet medical needs with so big naive patient population. So all of this, I think, it cannot be dominated by geopolitics. It will be eventually driven by the market need.

Yes. Sure. Yes. That's really insightful. And actually, apart from licensing, we're always thinking of -- Zai Lab is also building in-house discovery capability and also for potentially every year, we're going to deliver 1 or 2, 2 to 3 INDs going forward. But what is the optimal strategy here, particularly when we talk about our near-term focus still going to be in China? So licensing model is definitely very attractive and efficient. And in-house discovery need probably more upfront investment and also involves higher level of risks. So how are we going to really balance the resources between those 2 different models and optimize the return of investment or return on the capital?

Yes. I think, Ziyi, that's a very question and that's a constant discussion internally. And we strongly believe these 2 actually are not mutually exclusive. If anything, they are really complementary. In-house discovery effort, in-house development team expertise are so crucial even through the success of our in-licensing. And as we look out in the next 3 years, we look forward to taking Zai Lab from a fully integrated biotech to a leading global pharma. With that, we really need to beef up on both fronts. And 3 years from now, Zai will have many commercial stage products, greatly expanded clinical pipeline and additional partnerships, strategic partnerships as well. And to your question, our in-house discovery committees will have by then reached major inflection point. And while in-house candidates may not be able to contribute to product-level revenue but they would have added significant shareholder value as they would have reached several clinical milestones by then. And I think as any innovation-driven company, investing in R&D is always necessary, is always paying back in medium term or even long term. And it's not something we can avoid. But having said so, Zai does have the experience and -- as a team to have discovered and developed drugs in-house and also either from China when we were working in China for the last 20 years or when we were working in the U.S. in multinationals, the Pfizers, Roche companies. And we -- the team collective experience will gradually -- well people will see our discovery effort really will pay back. And over the last -- now almost 6 years since company inception, we have spent only about $408 million, perhaps a little bit more than that now. And we have already created such a pipeline and there's 2 commercial products launched not only in Hong Kong, Macau, but also in Mainland China. And we also have seen many IND CTA approvals. I think some of those first in months already ongoing from internal discovery effort and that, as I mentioned, they will reach value inflection points a few years down the road. As we promised at IPO, in 2020, we will have at least 1 or 2 in-house discovery and -- in 2 clinics. And we are actually doing that. We have not released those news because we do not want to flood the market with news that are not making material impact. But I hope in next few years, they will when they reach clinical -- really the key clinical value inflection points. Jonathan, I think you've been here with -- you joined Zai since very early and for more than 5 years. Do you want to add any color on our internal discovery, even though I know you had a very external in-licensing?

Yes. No. Absolutely. Thank you, Samantha. I think they really complement each -- our discovery and licensing. I don't think we -- I'd say we really have a lot of track record. I think we don't really sort of emphasize our discovery that much. But in fact, when -- Samantha, I think when you were at Hutchison MediPharma, when you've founded that company and then of course, within our senior management team brought a team, quite a few people are originally from Hutchison and then also from Pfizer. But at Hutchison, it's really the first company in China that piloted in innovation. And if you look at the pipeline today, I think there are 2 approved assets and another that's in NDA stages. And I think a lot of that is credit to Samantha and the team for the discovery. So we do have track record in discovery, but discovery does take time. So in the meantime, licensing, especially these late-stage assets, that's to come to focus a bit more. But I'm sure, over time, very confident with our team's strong discovery capabilities and know-how. We have a much different balance as the time goes. And I think also discovery helps licensing, as Samantha said. We have a strong discovery team that builds a lot of know-how in the preclinical, in the targets, the MOAs. That really helps us assess the licensing assets. And also in the future, if these in-house discover programs produce good data, that also we can out-license, we can have various options and structures to even enhance our licensing efforts. So they're really complementary, and we also have a lot of track record in this perspective.

Yes. I think there's one thing I'm always curious because Zai Lab used to be -- and now is still pretty much focused in oncology space and also autoimmune infections. And in oncology, through the collaboration with Regeneron, actually, we are entering hematological cancer space. So that actually looks -- the company is still exploring new therapeutic focus through in-house R&D and licensing deals. So is there any specific area actually you will be looking at in the years to come?

Oh sorry, I am muted. Yes. That's a good question. Well as you just mentioned, we look -- we continuously look to expand in areas where we see there's a great synergy with our existing team. With our existing pipeline that you mentioned, we expanded into -- we historically stayed in solid tumor. Now we expanded in liquid tumor as well. And having -- and we will continuously looking for synergy and -- vertically but also horizontally. So if we see opportunities that justify the investment and justify the -- the NPV justify the investment for return, we -- as you know, we, as a company, shareholder are creating -- shareholder value is our #1 priority as well as deliver care to patients. So we would not even though opportunities that present to us justify for expansion. So that's just a short answer for you, Ziyi.

Yes. Sure. Sure. I think -- and there's another milestone. Late last year and this year, Zai Lab really transitioned into a commercial stage company with launch of ZEJULA and also with Optune accrued. So in terms of the sales and marketing, our commercial strategy, how do we actually going to differentiate ourselves from like domestic companies, large domestic local companies and also multinationals as well as some of the emerging biotech names? I think the PARP is probably one of the example probably in 2, 3 years' time because ZEJULA is in the market and Lynparza is in the market -- is coming from AstraZeneca and Merck in China, those are multinationals and potentially, they're stronger in the market, some large domestic college company. So how we are going to differentiate ourselves from those companies in terms of commercialization?

That's a very good question. And let me say, first of all, let me draw your attention to the team. We do have a very experienced commercial team. And this team together has launched the top 10 oncology drugs in China prior to the PD-1 days, of course, because they already joined us. And secondly, this team and -- have demonstrated their competitiveness. And especially, you talk about against Lynparza, AstraZeneca because in Hong Kong, the full year sales of our ZEJULA -- even though we launched 18 months behind the full year sales of ZEJULA, we took over 75 -- 71% market share from our competitor, AstraZeneca. So I think that speaks to the team's execution, the team's experience in this field. And thirdly, I think it's very important, we have to really come back to what kind of products we have. I think for Zai, we're very, very focused on bringing -- discover, develop first-in-class or that's first class. In some cases, only in class. For example, ZEJULA, we are the only in class. And -- or best in class in, let's say, ZEJULA's case, as you've seen from ZEJULA's not only the second-line data, but also first line. And it's very differentiated from our competitors. And we're very differentiated from the prospect that not only efficacy, it's a pure efficacy, but also very clean safety profile. And it's many other attributes that are listed, which I would not go to further details. But again, there is also -- you saw with our partner, GSK, just announced the first-line approval for ZEJULA. ZEJULA was the only one and -- given all-comer monotherapy status for second -- for first-line ovarian cancer, mainly therapy versus our competitor, Lynparza. It only gave gBRCA an indication for first line. That's only account 12% to 15% of the population. And you mentioned other names, not other companies may come, but I think right now, from what we've seen, there are no PARP inhibitor or -- have even finished the second-line trial recruitment or the trial -- announced trial results or don't even mention first line. So this give us a quite time to establish our market position. And we have very strong confidence in our team, in our products and we think in the end, the products will differentiate itself.

Yes. That's true. There's another thing about the commercial because we have a pipeline not only for oncology, but also for anti-infectives. Zai Lab actually gave the commercial rights for omadacycline to a third-party partner in China. So how much of the focus will anti-infective be compared to oncology? And in terms of future commercialization of some of the similar anti-infective products, is it going to be depending on leveraging those outsourcing or third-party partners rather than building our own sales team for that?

Well we remain committed to infectious disease area. As you know, the market is still largest in China in that therapeutic area. And -- but of course, the generics dominating the market. And -- but multiple drug-resistant problem in China remains significant. And the government has put this on their agenda to tackle. And the fact we -- our omadacycline was given not only the acceptance but also gives fast-track approval, priority review status, it really speaks to the highlight, the importance of this drug for unmet medical needs because since the regulatory reform, since the establishment of this -- you recall the priority review status, we were the first one, omadacycline was the first one ever given such a status But we currently -- we are still a young company. And for example, for omadacycline, the CABP is a large community disease. And to fully unlock the commercial potential, it does require large sales force to cover a broad market not only in big cities, but also in lower-tier markets. That's why we granted promotion rights and -- with the third-party. So we remain on the development, manufacturing, regulatory, intellectual property and other product-related rights. And we want to leverage third parties' large thousand sales force dedicated to the -- to effect this expertise to -- for this first product community launch. However, as unlike omadacycline, like durlobactam, our other anti-infective drug currently in Phase III, it has profile of specialty care product, requires a full gram negative strength and requires a more specialized team focusing on big city and the major hospitals and ICUs. For that product, we do want to launch that with our own internal team. We are in the process of, of course, looking at the commercial variabilities.

Great. And there's another thing is Optune. Optune is very unique. It's a devices. And in China, I think this new modality in treating cancers is probably -- in terms of commercial, there's going to be some challenges for everybody. So for Zai Lab, what's going to be the real commercial business model for Optune in terms of the patient selection, in terms of the reimbursement pricing or promotion, how are we going to do that? I think this is probably the first of this kind in China market.

Yes. Well we did that once in Hong Kong. And even though Hong Kong's 7 million population, we still did a very good penetration. And we still -- by our partner, they basically -- according to our partner, Hong Kong, Macau's launch was one of the best, if not the best launch ever taken for ZEJULA. And the ramp-up curve was very fast. And so we will repeat the same execution excellence in China. We will disclose the pricing strategy at launch by end of June, and we do -- we will take account -- take into account the current pricing in the U.S., Japan and Hong Kong. Pricing will be at a discount to global pricing levels, but it won't be a significant discount given this -- the cost of innovation, but also given the fact there's still a large self-pay market and large unmet medical needs in China. In the first year of launch, we plan to have 50 sales reps covering 250 hospitals, approximately 1,500 physicians. And we will have incremental hire towards the end of the year. We'll have a device service specialist and -- which is patient-facing team strategically covering key geographics. And also, as you know, this market is highly concentrated, top 25 -- 250 hospitals representing approximately half of the national patient tool. And for now, we're focusing on private pay, as you know, and -- but we're also increasingly in discussion with commercial insurance in China. And -- which is big enough given the newly diagnosed GBM coincidence, is 45,000 per year in China. And also, this is an innovation -- is the only -- innovative only in class technology with a large market. And this is the first drug ever for -- treatment option ever approved for 15 years for GBM patients in China. So we think we have a tremendous opportunity here. Having said so, we continue to evaluate payer mix options going forward given our belief that TTFields franchise will be commercially important in China as well.

Yes. That's right. I think going back to the deal with Regeneron because recently, this year and last year, we actually see increasing number of China biotech names collaborating with some of the big pharma or global biotech. So this is a new trend that why so many different biotech names are trying to get big name support or big names global collaboration rather than just working with some of the small mid-cap biotech to get some of the high-quality assets. So is there any specific value from this type of collaborations?

You mean with Regeneron?

Yes, with Regeneron or this kind of new model, I mean China biotech collaborating with top 20 or top 10 global big pharma or biotech.

Well I think young -- many young companies needs validation, right? Validation with big names will help. And for Zai, it's very important and -- for us to select the right assets. And so I think each announcement you're seeing in collaboration is what is the nature, what is really in the announcement, what is the announcement for, have you observed any actually in-licensing from multinationals or rather say saw some cases collaboration with multinational rather say they give their technology platforms, which they currently do not use and they collaborate with Chinese pharmas to get the first -- take the first shot. Then if any positive signals come out of it, they more or less now have the option to opt in, right? And their deals are like combo with the existing pipeline with some of the multinationals are, let's say, at certain times, the menu, the -- is generic already. So I think all of those are good deals and -- for each individual companies. For Zai, we look for innovative first and best-in-class assets, whether they're from multinational, which is hard usually, especially with the ones that have China presence. But with Regeneron, it's also very science innovation-driven, has impeccable track record in bringing unmet medical needs to patients. Those other companies, we're seeing really align more with how we're going to develop, how we want to generate our pipeline. So we really think the Regeneron deal really -- not only from the asset perspective, but also we are going to join force in global development speaks to the quality of Zai, and partners have also recognized Zai's strategic value as much as scientifical expertise and clinical expertise. So overall, I think every deal has its different meats to it, and we are a very simple company. We are a meat-and-butter company.

Yes. That's right. I think we are running out of time. But to wrap up the session, I would like you to give us -- give the investors what to look to in the second half and over the next 12 months. What could potentially be the key catalyst and the key milestone to watch?

That's a good one. Since Billy, you are the -- as the CFO hasn't talked, I will let you wrap it up.

Thank you, Samantha. So the -- in terms of the key inflection points with near-term catalysts, we actually have -- we've had a pretty good track record so far this year despite the pandemic of executing well, big and small, and we'll continue that trend. But in the interest of time, instead of going through a long list, let me just highlight a few things that the investors should focus on as well as yourself, Ziyi. So firstly, in commercialization, it's quite important for us to demonstrate commercial success, both for Optune, which will be launched later this month, as well as niraparib. And the reason why that we believe will serve as a catalyzing event this year or next year is because we believe that if we can do that and execute well, we would give the investor community a lot of confidence and perhaps motivation to look at the rest of our pipeline. And so that is not lost upon us. Secondly, on the pipeline, while we do that, we'll look to continue to expand our current portfolio, which is already quite expansive, as you know. So that will kind of, of course, be the opportunities that we already covered on this call as well as in-house discoveries that we covered on this call. But the one thing that we did not cover on this call is that given the scale of our pipeline as it currently stands, which we'll also expand, there has been some significant opportunities for us to really analyze our current portfolio and come up with some interesting combination opportunities that are quite unique to us and that nobody else has. So that's another way for us to expand our pipeline, which we've already started doing, as you may know. And then in terms of regulatory filing, Samantha already covered the 2 NDAs that we filed this year, with the priority review status that we gained shortly thereafter, and we're in a position to not stop there, but submit 1 or even 2 more submissions for approval. And so that's quite exciting. And then in terms of developments, I won't go through every single one of our programs given that we have over 25 ongoing and planned trials. But clearly, for many of them, we're going to have some interesting milestones coming up, whether it's -- whether they're data events, whether they're enrollment events and everything between, we have several. So -- and especially for our key programs like tumor treating fields, ripretinib, margetuximab and 2 biospecifics, et cetera. So -- so yes, those are the key highlights, and I'll stop there in the interest of time. So I'll turn it back up to you.

Yes. Let me add a few. Yes. I would just say like along what Billy was just saying and for the next 3 years and -- we have not only each year have additional product launch, an additional NDA filing, additional new deals. Additionally, we also at each of our existing pipeline, we have a franchise approach. So we will have additional indication expansion. We have also combo opportunities. So I think that's the next -- and also in-house reach key value inflection points. I think that perhaps give you a full picture of the next 3 years, what you should expect.

Yes. That's great. One IND, 1 deal, 1 approval, 1 new indication, 1 combo probably.

Yes. As a baseline, as a baseline.

Yes. Okay. Great. Thank you so much, Samantha, Billy and Jonathan, for attending the session and share your insights with investors and with us. Thank you so much. And looking forward to more milestone events coming from Zai Lab going forward.

Thank you.

Thank you.

Thank you.

Thank you. Bye.